Picture: ISTOCK
Picture: ISTOCK

International investment exposure is non-negotiable from the point of view of portfolio diversification.

However, according to Mike Wilmot, head of investments at Nedbank Private Wealth: “International investment objectives based on unreasonable tax outcomes, opaque asset ownership or speculative short-term currency views have no place in any sensible process. It is therefore crucial to consider the impact any international investments may have on your will, your tax and estate liabilities, tax administration, and compliance with exchange control and other legislation.”

There are various ways to get international exposure, including:

  • Assets you buy and sell in South Africa where there is indirect (companies with offshore earnings) or direct (via feeder funds) international gearing.
  • Using institutional foreign investment allowances (commonly referred to as “asset swap” mechanisms) where rand amounts are externalised to buy international assets offshore, but the proceeds must be returned to South Africa in rand.
  • Using your annual foreign capital and travel allowances to permanently externalise rands and invest in international assets in another currency.
  • Special application to the South African Reserve Bank to obtain permission to permanently externalise additional amounts.

International asset ownership can be structured in your own name or jointly (in certain circumstances) in entities such as companies and trusts; within insurance wrappers such as endowments; and within South African retirement vehicles such as retirement and living annuities.

Wilmot points out that with this decision, “you need to compare each option and combination of options and assess this against what is most suitable for your needs, and the costs and benefits of your choices”.

Some of the factors to compare include:

  • Continuity: The extent to which material events such as liquidation or death can disrupt the continued management of or access to your assets.
  • Orderly distribution after death: The estate consequences and formalities such as the possible freezing of assets and illiquidity timeframes as well as related costs required to wind up your estate.
  • Protection for dependants: This includes financial protection for minors or those with disabilities, planning for the education of descendants, or intergenerational wealth transfer.
  • Protecting assets from seizure: The ownership structure will affect legal ownership and each vehicle will provide varying combinations of protection from, say, sovereign (government) and creditor risk while introducing different counterparty risks, such as life company credit risk and regulatory risks.
  • Tax cost and administration implications: The applicable tax rates and associated tax risks, as well as the tax administration consequences that stem from how your assets are owned.
  • Flexibility: At the outset, ensure your assets are owned in a way that allows for changes in your circumstances, regulations and best practice over time.

And then there are tax considerations. South Africans must declare their global income and capital gains for tax purposes. South African residents are taxed on a residence-based system of taxation when investing internationally. This means that no matter where your assets are situated or how they were acquired, you will be taxed on – and obliged to declare – your global income (including any capital gains).

The rand value of international investments for estate duty purposes will increase when the rand depreciates and decrease when it appreciates

In addition, South African residents are, with relatively few exceptions, liable for South African estate duty on their international assets, including assets acquired using the investment allowance facilities.

Many South Africans are not aware of this fact or the impact it can have. Estate duty rates in South Africa are 20%.

Wilmot explains the impact of any rand deprecation on your estate duty liability in South Africa: “The rand value of international investments for estate duty purposes will increase when the rand depreciates and decrease when it appreciates. Given South Africa’s higher inflation rate and other factors, the risk is towards rand depreciation over time. This increases your potential estate duty liability due to currency translation gains on international investments.”

What about the need for an international will? “While many people choose to have a single worldwide will, this is not always the best option,” says Wilmot. “There are several complexities to consider, such as the nature of the assets you hold and the type of jurisdiction.”

There are different ways to deal with international assets in a will, including:

  • a single will that applies to your entire worldwide estate;
  • separate wills for each international jurisdiction where the international assets are situated, and a separate will dealing with South African assets; or
  • one to deal with worldwide assets outside South Africa (across jurisdictions) and a separate will dealing with South African assets. 

The nature of your assets and the jurisdiction will determine which will is most suitable.

“The first choice for many people is to have a worldwide will. However, this is not always practical,” says Wilmot.

The nature of your international assets and the jurisdiction in which they are situated will determine whether you require a separate will, with each of the following requiring different considerations:

  • Immovable property in another country
  • Unit trusts or shares in another jurisdiction
  • Assets in forced heirship (civil law) jurisdictions such as France, Portugal, Germany and Italy    
  • International bank accounts

Fiduciary specialists are experts in their field and their job is to help investors make informed, considered decisions regarding their global wealth.

“It is important to take into account every individual’s unique needs, family situation, objectives and preferences, which is why globally integrated planning is essential,” Wilmot says.

Mike Wilmot is presenting at the Allan Gray Investment Summit on August 31 at the Sandton Convention Centre, Johannesburg. This new one-day event aims to help investors to protect and grow their wealth. For more information and to book tickets, visit www.investmentsummit.co.za.

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